Question

Of 20 >

Attempt 2
Consider the hypothetical interest rates in the table below. Based on that information, what is the pure interest rate?
Interest Rate
Annual
Percentage
4%
8%
N
30-year mortgage
5-year new car loan
20-year Treasury
bond
Prime interest rate
Credit card
1.5%
3.5%
14%
Pure interest rate:
1

Answer 1

Answer: 1.5%

Explanation:

The Pure Interest Rate refers to the rate in a theoretical market where there is no risk as economic conditions can be predicted with certainty.

Sadly, uncertainty will always exist but there are rates that are close enough to the Pure interest rate such as US Government Security rates.

The United States has never defaulted on a debt payment in the modern era and as such is known to offer the least risky rates in the world. The rate on US Securities can therefore be considered as close as possible to the pure interest rate.

Given the rates in the question, the Pure Interest rate would be the 20-year Treasury bond rate of 1.5%.